Housing has supposedly "hit bottom." Perhaps it will drop abruptly in
a phase shift to much lower valuations.

Way back in August 2006, near the top of the housing bubble, I suggested a two-part
scenario for the housing bust: it would take eight more years to play out, and the
declines would occur in sharp downlegs following a phase-shift model.

A few months later, literally at the top of the housing bubble in early 2007,
I suggested that a mere 4% of homeowners defaulting could trigger a collapse of
the entire U.S. housing market.

That is pretty much exactly what happened, for when the 4% who couldn't pay their subprime
mortgages folded, they took down an exquisitely corrupt and vulnerable banking sector
and the FIRE (finance, insurance, real estate) economy which had come to depend on it.

As I noted in
Phase Shifts, Stick/Slip and the Demise of Our "Socialist" Housing Policy
(February 26, 2010), the "recovery" in housing visible in the chart below was
entirely the result of a 99% "socialist" Central State intervention/prop job: the
Federal Reserve bought $1.1 trillion of dodgy mortgages to mask the bad debt and
keep interest rates low, and the Federal government flooded the housing market with
fee money via subsidies and absurdly cheap, central State-guaranteed FHA loans.

Now that this massive Central State intervention has ended, housing sales and
values are succumbing to gravity.home sales and prices fall:

The National Association of Realtors said Monday that sales of previously occupied homes fell last month to a seasonally adjusted annual rate of 4.88 million. That's down 9.6 percent from 5.4 million in January. The pace is far below the 6 million homes a year that economists say represents a healthy market.

Nearly 40 percent of the sales last month were either foreclosures or short sales, when the seller accepts less than they owe on the mortgage.

One-third of all sales were purchased in cash - twice the rate from a year ago. In troubled housing markets such as Las Vegas and Miami, cash deals represent about half of sales.

The median sales price fell 5.2 percent to $156,100, the lowest level since April 2002.

The median price for a new home sold in February fell 13.9% from the prior month
to $202,100, the lowest since December 2003.

Here we see the first phase shift decline and the "recovery," which is now
rolling over.

I submit that the forces acting on price are mutually reinforcing to the point that
price will drop rapidly in a second phase shift, with the target noted on the chart:
a return to the price levels of 2000.

Once we get into the 2012-14 timeframe, then I expect a third phase shift will drop
prices back to 1987 levels. As many observers have noted, bubbles don't retrace to
historical averages--they over-correct to extremely low values.

2. Interest rates will rise. Most financial analysts are supremely confident that
the Fed can keep interest rates near-zero forever. I suspect their confidence
is misplaced. As I discussed yesterday, the Fed has backed itself into a corner,
where if it pursues QE3 then it will fire up inflation that will destroy profit margins
and household purchasing power. If it ceases to buy U.S. Treasury debt, then interest
rates will shoot up.

As interest rates rise, the amount of money home buyers can borrow drops. House prices
follow this dynamic.

3. Income for the bottom 90% is stagnant. All the bogus "housing is now affordable again"
charts floating around all base their rosy conclusions on median income,
neatly avoiding the reality that the top 10% has garnered the majority of income
gains. Factor out the top 10% and you find real incomes have actually declined
for the lower 90%.

The same effect is true of the "wealth effect" powered by the speculative risk trade
bubbles in stocks and commodities. These portfolio increases have only enriched the
top 10% who own the vast majority of the financial wealth.

So yes, real estate favored by this top 10%--Manhattan, Westwood, San Francisco, etc.--
will hold its own as those benefiting from fat Federal contracts, Wall Street's
renewed license to practice piracy, the
bubble in lighter-than-air Web 2.0 stocks, etc. try to outbid each other, but for
most housing, the support created by demand has just melted like dirty ice on a hot
Spring day.

4. There are too many houses and not many buyers. The demographics are this: Baby
Boomers are trying to sell to cash out or move, and the impoverished generations behind
them cannot afford bubble-era prices. Just because prices have retreated to 2002 levels
doesn't mean they're cheap--2002 was already a bubble, as you can see in the chart.

5. The Federal-supported "recovery" is in trouble, politically and financially.
As long as the nation obeys the whip of the Fed and allows it to print $1 trillion
to buy Treasury debt every year, then the travesty of a mockery of a sham can continue.
But as I noted yesterday, this policy is destroying the dollar and the purchasing power
of households. That game cannot run for long without political pushback. Saving
the "too big to fail" banks and the Financial Plutocracy might be Item #1 on the Fed's
list, but it ranks decidedly lower on voters' agendas.

6. Every investor who bought with cash because "this is the bottom" will 1) be underwater
and anxious to sell and 2) be out of cash, having bet their capital playing
"catch the falling knife" with real estate valuations. Sorry, cash buyers:
the knife is still falling.

"This guy is THE leading visionary on reality.
He routinely discusses things which no one else has talked about, yet,
turn out to be quite relevant months later."
--Walt Howard, commenting about CHS on another blog.

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